Iran’s Pact With China Is Bad News for the West

By Alam Saleh and Zakieh Yazdanshenas

A recently leaked document suggests that China and Iran are entering a 25-year strategic partnership in trade, politics, culture, and security.

Cooperation between China and Middle Eastern countries is neither new nor recent. Yet what distinguishes this development from others is that both China and Iran have global and regional ambitions, both have confrontational relationships with the United States, and there is a security component to the agreement. The military aspect of the agreement concerns the United States, just as last year’s unprecedented Iran-China-Russia joint naval exercise in the Indian Ocean and Gulf of Oman spooked Washington.

China’s growing influence in East Asia and Africa has challenged U.S. interests, and the Middle East is the next battlefield on which Beijing can challenge U.S. hegemony—this time through Iran. This is particularly important since the agreement and its implications go beyond the economic sphere and bilateral relations: It operates at the internal, regional, and global level.

Internally, the agreement can be an economic lifeline for Iran, saving its sanctions-hit, cash-strapped economy by ensuring the sale of its oil and gas to China. In addition, Iran will be able to use its strategic ties with China as a bargaining chip in any possible future negotiations with the West by taking advantage of its ability to expand China’s footprint in the Persian Gulf.

While there are only three months left before the 2020 U.S. presidential election, closer scrutiny of the new Iran-China strategic partnership could jeopardize the possibility of a Republican victory. That’s because the China-Iran strategic partnership proves that the Trump administration’s maximum pressure strategy has been a failure; not only did it fail to restrain Iran and change its regional behavior, but it pushed Tehran into the arms of Beijing.

In the long term, Iran’s strategic proximity to China implies that Tehran is adapting the so-called “Look East” policy in order to boost its regional and military power and to defy and undermine U.S. power in the Persian Gulf region.

For China, the pact can help guarantee its energy security. The Persian Gulf supplies more than half of China’s energy needs. Thus, securing freedom of navigation through the Persian Gulf is of great importance for China. Saudi Arabia, a close U.S. ally, has now become the top supplier of crude oil to China, as Chinese imports from the kingdom in May set a new record of 2.16 million barrels per day. This dependence is at odds with China’s general policy of diversifying its energy sources and not being reliant on one supplier. (China’s other Arab oil suppliers in the Persian Gulf region have close security ties with the United States.)

China fears that as the trade war between the two countries intensifies, the United States may put pressure on those countries not to supply Beijing with the energy it needs. A comprehensive strategic partnership with Iran is both a hedge and an insurance policy; it can provide China with a guaranteed and discounted source of energy.

Chinese-Iranian ties will inevitably reshape the political landscape of the region in favor of Iran and China, further undermining U.S. influence. Indeed, the agreement allows China to play a greater role in one of the most important regions in the world. The strategic landscape has shifted since the 2003 U.S. invasion of Iraq. In the new regional order, transnational identities based on religious and sectarian divisions spread and changed the essence of power dynamics.

These changes, as well as U.S. troop withdrawals and the unrest of the Arab Spring, provided an opportunity for middle powers like Iran to fill the gaps and to boost their regional power. Simultaneously, since Xi Jinping assumed power in 2012, the Chinese government has expressed a stronger desire to make China a world power and to play a more active role in other regions. This ambition manifested itself in introducing the Belt and Road Initiative (BRI), which highlighted the strategic importance of the Middle East.

China grasps Iran’s position and importance as a regional power in the new Middle East. Regional developments in recent years have consolidated Iran’s influence. Unlike the United States, China has adopted an apolitical development-oriented approach to the region, utilizing Iran’s regional power to expand economic relations with nearby countries and establish security in the region through what it calls developmental peace—rather than the Western notion of democratic peace. It’s an approach that authoritarian states in the Middle East tend to welcome.

U.S. President Donald Trump’s withdrawal from the nuclear deal with Iran in 2018, and the subsequent introduction of the maximum pressure policy, was the last effort by the U.S. government to halt Iran’s growing influence in the region. Although this policy has hit Iran’s economy hard, it has not been able to change the country’s ambitious regional and military policies yet. As such, the newfound strategic cooperation between China and Iran will further undermine U.S. leverage, paving the way for China to play a more active role in the Middle East.

The Chinese-Iranian strategic partnership will also impact neighboring regions, including South Asia. In 2016, India and Iran signed an agreement to invest in Iran’s strategic Chabahar Port and to construct the railway connecting the southeastern port city of Chabahar to the eastern city of Zahedan and to link India to landlocked Afghanistan and Central Asia. Iran now accuses India of delaying its investments under U.S. pressure and has dismissed India from the project.

While Iranian officials have refused to link India’s removal from Chabahar-Zahedan project to the new 25-year deal with China, it seems that India’s close ties to Washington led to this decision. Replacing India with China in such a strategic project will alter the balance of power in South Asia to the detriment of New Delhi.

China now has the chance to connect Chabahar Port to Gwadar in Pakistan, which is a critical hub in the BRI program. Regardless of what Washington thinks, the new China-Iran relationship will ultimately undermine India’s interests in the region, particularly if Pakistan gets on board. The implementation of Iran’s proposal to expand the existing China-Pakistan Economic Corridor along northern, western, and southern axes and link Gwadar Port in Pakistan to Chabahar and then to Europe and to Central Asia through Iran by a rail network is now more probable. If that plan proceeds, the golden ring consisting of China, Pakistan, Iran, Russia, and Turkey will turn into the centerpiece of BRI, linking China to Iran and onward to Central Asia, the Caspian Sea, and to the Mediterranean Sea through Iraq and Syria.

On July 16, Iranian President Hassan Rouhani announced that Jask Port would become the country’s main oil loading point. By placing a greater focus on the development of the two strategic ports of Jask and Chabahar, Iran is attempting to shift its geostrategic focus from the Persian Gulf to the Gulf of Oman. This would allow Tehran to avoid the tense Persian Gulf region, reduces the journey distance for oil tankers shipping Iranian oil, and also enables Tehran to close the Strait of Hormuz when needed.

The bilateral agreement provides China with an extraordinary opportunity to participate in the development of this port. China will be able to add Jask to its network of strategic hubs in the region. According to this plan, regional industrial parks developed by Chinese companies in some Persian Gulf countries will link up to ports where China has a strong presence. This interconnected network of industrial parks and ports can further challenge the United States’ dominant position in the region surrounding the strategically vital Strait of Hormuz.

A strategic partnership between Iran and China will also affect the great-power rivalry between the United States and China. While China remains the largest trading partner of the United States and there are still extensive bilateral relations between the two global powers, their competition has intensified in various fields to the point that many observers argue the world is entering a new cold war. Given the geopolitical and economic importance of the Middle East, the deal with Iran gives China yet another perch from which it can challenge U.S. power.

Meanwhile, in addition to ensuring its survival, Tehran is going to take advantage of ties with Beijing to consolidate its regional position. Last but not least, while the United States has been benefiting from rivalry and division in the region, Chinese-Iranian partnership could eventually reshape the region’s security landscape by promoting stability through the Chinese approach of developmental peace.

Alam Saleh is a lecturer in Iranian studies at Australian National University’s Centre for Arab and Islamic Studies. He is also a council member of the British Society for Middle Eastern Studies. Follow him at @alamsaleh1.

Zakiyeh Yazdanshenas is a research fellow at the Center for Middle East Strategic Studies. Her expertise mainly focuses on great-power rivalries in the Middle East. Follow her at @YzdZakiyeh.

Photo: IRNA

Concern in Iran Over China Commerce as Trump Gets Trade Deal

Last week, an official from Iran’s communications ministry received an email from a Chinese supplier informing them that Bank of Kunlun, the state-owned bank at the heart of China-Iran bilateral trade, is weighing whether to cease processing Iran-related payments.

The email warned that after an April 9 deadline, “Kunlun may stop handling payment [sic] from Iran. For the exact situation then, we can only wait for further notice from the bank.”

The bank was set to inform clients that “all the payment [sic] should be received and goods should be shipped before April 9, and all PI (pro forma invoice) dates should be before January 10.”

The official, who shared the contents of the email with Bourse & Bazaar on condition of anonymity, speculated that the change in policy at Bank of Kunlun could be related to the recent agreement reached between Chinese and American negotiators over the first phase of a new trade deal.

If the email proves accurate, this would not be the first time that Kunlun has suddenly changed its policy in response to political developments in Washington. The bank paused its Iran business for one-month period following the Trump administration’s reimposition of secondary sanctions on Iran in November 2018. When Iran transactions were resumed, a new policy limited payments for trade in “humanitarian and non-sanctioned goods and services between Iran and China,” minimizing direct contravention of U.S. sanctions.

Reached for comment, Wu Peimin, the economic counselor at the Chinese embassy in Tehran, stated the embassy had not been made aware of any impending change in policy at Kunlun and that concerns amount to a “hypothetical situation.”

As analysts Julia Gurol and Jacopo Scita detail in a recent report, China’s has continued to purchase Iranian oil in defiance of U.S. sanctions in an “attempt to appease Iran and avoid a full-scale conflict in the Persian Gulf.” Although China has rebalanced its imports in favor of Saudi Arabia and could easily find an alternative supplier for the low volumes of oil still imported from Iran, recent incidents such as the attack on the Aramco facilities in Abqaiq and Khurais have made clear the risks to Chinese energy security if Iran acts on threats to prevent all exports through the Strait of Hormuz in the event it is prevented from exporting its oil.

But while China’s strategic interests are well-served by maintaining trade ties with Iran, albeit at reduced levels, there remains the possibility that China may have made tactical concessions related to Iran as part of its trade negotiations with the United States. For their side, U.S. officials have insisted that they would not reduce sanctions pressure on Chinese firms trading with Iran in order to gain concessions from Beijing related to the trade deal.

Chinese trade with Iran has fallen due to sanctions pressures, but remains a pillar of Iran’s economic resiliency in the face of the Trump administration’s “maximum pressure” sanctions campaign. Iran’s bilateral trade with China totaled USD 23 billion last year. While the annual total has fallen 34.5 percent, Iran has sustained significant oil and non-oil exports to China, totaling just over USD 13.2 billion dollars. The earnings from this trade have enabled Iran to afford continued imports of Chinese raw materials, parts, and machinery that support Iran’s manufacturing sector—total imports were USD 9.7 billion in 2019.

Much of this trade was facilitated through the payment channels available at Kunlun, a so-called “bad bank” sanctioned by the United States in 2012 for its critical role in supporting Chinese trade with Iran, particularly oil purchases by major state refiners like CNPC and Sinopec.

Mohammad Reza Karbasi, who is responsible for international affairs at the Iran Chamber of Commerce, expressed confidence that even if Kunlun proceeds to eliminate its Iran business, other smaller Chinese banks will step-in to support the longstanding bilateral trade between China and Iran.

“Iran is important to China and the same is true the other way round as well. Sure, there are attempts by Western governments to try and interfere with the expansion of ties between us, but we believe the Chinese won’t let them succeed given the trust that has been built between our two counties through years of cooperation,” Karbasi said.

In a recent interview focused on the trade deal, Treasury Secretary Steven Mnuchin stated that the Trump administration was “working closely with [China] to make sure that they cease all additional activities [with Iran]." The Trump administration has continued to sanction Chinese firms engaged in Iran trade, most recently targeting several buyers of Iranian oil.

Mnuchin also stated that “China state companies are not buying oil from Iran.” The statement remains factually incorrect—Chinese firms such as CNPC remain directly engaged in Iran oil purchases—but it may refer to a new understanding between China and the United States that is yet to be implemented.

Richard Nephew, who led sanctions policy at the State Department during the Obama administration, recently told S&P Platts that he does not expect such designations and the related pressure to compel China to drop it’s Iran trade outright.

However, reports that Iran’s January oil exports are significantly higher than the monthly average since May 2019 may reflect stockpiling of cheap Iranian oil by Chinese refiners ahead of an expected change in policy and reduction in imports. A similar pattern was observed when exports peaked in March 2019 ahead of the May 2019 revocation of the waiver permitting Chinese purchases of Iranian oil.

Given the timing, concerns in Tehran center on whether China will further downgrade its trade with Iran in order to avoid jeopardizing its new understanding with the Trump administration on larger issues of economic policy.

Massoud Maleki, the director of the Bureau for Developing Countries at the Tehran Chamber of Commerce said he was skeptical of reports Kunlun would bring an end to its Iran business, but warned of the consequences if there were such disruptions.

“Iran and China’s trade is not a paltry amount for it to be carried out through suitcase trade or exchange bureaus. If this is true, then I’m afraid that we will have to deal with a whole lot of hardship. This, I presume, is unlikely, but if it’s confirmed we must prepare and take necessary measures,” said Maleki.

Farhad Ehteshamzad, an Iranian industrialist and former head of Iran Auto Importers Association, echoed the call for preparations in case the U.S.-China trade deal has changed China’s intentions regarding trade with Iran.

“Transactions through the Bank of Kunlun had already been made difficult during the past two or three months. Kunlun in China was like one of our small credit institutions in Iran before being trusted with the responsibility to handle Iran payments. It gets all its reputation via collaboration with Iranian businesses.’

He added that if the industry ministry official had received such an email, the Central Bank of Iran has also been forewarned and urged officials to ensure that the Iranian funds currently held in accounts at Kunlun are not blocked.

“An emergency meeting should be held to determine how much capital lies in the bank and to inform traders and economic players before their money gets blocked. Also, if there is the possibility for certain goods to be shipped before April 9, this has to be done. If there isn’t, then money has to be transferred from Kunlun bank to other banks as quickly as possible before the money is out of reach.”

Ehteshamzad estimates that around 80 percent of payments made to support China-Iran bilateral trade are currently processed via Kunlun. “Yet, this does not mean if the bank stops its services, trade will come to a halt,” he insisted.

Citing the creativity and resolve of Iran’s private sector, Ehteshamzad noted that Iranian business boast “a myriad ways to circumnavigate the U.S. sanctions. The only downside to this is that transaction costs will rise, meaning goods will take longer to be delivered and will cost more.”

For now, Iran’s business community is waiting nervously to see whether decisions made in Washington and Beijing will force them to put their creative powers to use once again. 

Photo: U.S. Embassy Beijing